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When Is It Better To Transfer Corporate Stock Vs Business Assets?

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Comments & Replies: 5     Views: 5112     Posted By: Timothy Cunha JD  Timothy Cunha JD: Business Broker, SF Bay Area



Topics: Deal Structures, Legal Issues     Tags: buying a business, deal structures, legal issues, selling a business


Contributor: Business Appraisals, Valuations Advisor

The real value of a stock sale is to the seller. It will reduce his taxes considerably. A stock sale can happen quicker as no bulk sale notice is need nor many other legal requirements. Theoretically you can complete a stock sale in a few days. The disadvantage for a buyer as stated by Tim Cunah are real especially regarding possible taxes liabilities.

I have sold businesses with a stock sale but there was a compromise on the business price and a seller guarantee covering possible liabilities.

Contributor: Transactional Attorney

Bob is absolutely correct that the real value of a stock sale is typically to the seller. But there are some cases where the sale, if done properly, can benefit both the seller and buyer.

For example, I participated in a transaction once where the business being sold had successfully gone through several audits as to the status of its classification of contractors and employees. The business model relied on the fact that the people providing services were classified as contractors.

If the business has been sold in an asset sale the new entity buying the assets would not have had the "safe harbor" protection the existing corporation enjoyed if there were ever another audit.

In this case the seller agreed to take a portion of the purchase price as a consulting fee (which the buyer could deduct that year) to offset the tax benefit the seller enjoyed at the buyer's expense by the stock sale as a whole.

With careful accounting planning and the right circumstances both the buyer and seller ended up in better positions than they would have in an asset sale.

I am not a tax attorney and the above is not intended as tax advice. Consult your own CPA and tax counsel before deciding whether a stock sale or asset purchase is right for your transaction.


As Mark points out, it generally is the ongoing credentials, licensing, certification, and similar "assets" that are specific to the corporate entity and that cannot be transferred to a new entity that would make a stock sale preferable to an asset sale. The seller in a stock sale can enjoy certain tax advantages over an asset sale; but, we help our sellers set up a Deferred Sale Trust to mitigate the effect of capital gains taxes, making a stock sale unnecessary.

Contributor: Business Broker, Northern California

Deciding whether to transfer a business via a Stock sale or Asset sale is much more than just about taxes. Tax is a very important component but so is understanding each transaction. Some businesses have licences or contracts in place that if severed, reduce the value of the business because the buyer may not be able to qualify for those licenses or contracts.

If a seller is suggesting they will only do an Asset sale only because of the tax consequences then that's a negotiation.

Each transaction is unique and needs to be fully understood before deciding whether an Asset sale or Stock sale. It's also where Section 338(h)10 of the IRS code comes in but that's complicated.


This whole discussion illustrates how important it is for the buyer and seller to retain competent legal and financial advisors, experienced and trained in business transfer transactions. Cutting corners on this cost can be disastrous to both parties--it's not worth the risk.

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Contributor: Business Broker, Northern California  Post ID: 862
Well said. This is so true.



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